Hello. I run a penny stock newsletter and have a question regarding the legality of selling stock during promotional coverage of the same stock. I'm not looking for answers regarding laws/rules for stock given as compensation. In this situation I am only referring to stock purchased on the open market.
To me it seems more ethical for the newsletter operator, who has a vested interest in his readers well-being and success, to be the one selling the stock than for it to be a third party who does not have an interest in the well-being of the newsletter readers. But I have always been told it is illegal for the newsletter owner to be the one who owns and sells the stock the newsletter is promoting. So everyone in the newsletter industry gets paid cash by third parties to promote stock, and disclaims all of this info in their promotional email.
I have researched case law thoroughly and it seems that it IS legal for a newsletter to own and sell the stock they are promoting, as long as some very specific things are disclaimed in clear and concrete language, and in plain view of the reader.
As I understand it, the newsletter must disclaim the exact number of shares they own, where and how they obtained the stock, and most importantly, that the newsletter intends to sell their entire position during the course of the stock's promotion.
Also I'm not sure, but possibly the average price per share the newsletter paid for the stock. (Please let me know if the average price per share is required information or not, if you can. Thanks!)
In cases such as The Miami SEC office against Dan Ryan/Penny Stock Chaser, and the lawsuit regarding a penny stock RCYT (Recycle Tech) and the promoters Pudong LLC
and OTC Solutions who promoted RCYT while they were selling RCYT, although they got the stock as payment instead of buying it on the open market.
Here is a link to the case against Pudong, OTC Solutions and others regarding RCYT:
The following statements in the complaint imply that the illegal aspect of what the promoters were doing was not actually the owning and selling of the stock. They imply the illegal activity was their complete lack of a clear statement expressing to their readers that their intent is absolutely to sell all of their stock while they are promoting it.
Complaint G on page 14 says: "OTC Solutions and Pudong Tout Recycle Tech Stock Without Properly Disclosing Their Stock Compensation Or Intent To Sell"
Page 14 goes on to say: "None of the newsletters disclosed the newsletter owner’s intent to sell shares, or named the source of the stock the newsletter had received."
Finally, section 69 on page 14 says: "OTC Solutions, engaged in the fraudulent practice
of “scalping,” specifically, selling the same stock his own reports on Recycle Tech were recommending that investors buy without disclosing the sales. "
Here is a link to the Dan Ryan/Penny Stock Chaser complaint:
On top of page 5, section C, 1 the allegation summary s: "The Defendants' Failure To Adequately Disclose Their Sale Of Stocks They Tout"
Since the SEC alleges they did NOT "adequately disclose" their sale of stocks they tout, it implies that there is a standard of "adequate disclosure" which the defendants did not meet.
That would mean to sell a stock while I am promoting it, I must meet all of the rules and requirements to have fully adequate disclosure.
Overall the problem seems to be these newsletters try to get away with a vague disclaimer
regarding their intent to sell. The accused newsletters use vague "we have the right to sell our stock, we may sell it at any time" kind of language that is not explicit enough to truly describe their actual intent of selling ALL of their stock, and doing it all during their promotion.
In addition to my full and complete usual legal disclaimer I use whenever I promote a stock when I am being paid by a third party, I will place an additional disclaimer at the very top of the page.
The disclaimer at the top of the page will be in large font bold type, and here is a sample:
"We are long ABCD stock. We have purchased 5 million shares in the open market, at an average price of $.012. We intend to sell our entire position during our promotional coverage of the stock, which may include at or near the time you receive this message. This is likely to hurt share prices and is a major conflict of interest. Consider this thoroughly before making trading decisions. We reserve the right to hold some or all of our position in ABCD during and after our promotional coverage if we choose to do so. We reserve the right to add to our ABCD position at any time without notice."
Please help me verify if I'm correct. I would like to move forward on doing this but can't risk breaking criminal or civil laws for any reason. Thank you.